Credit Unions Adding Members, Loans at Accelerated Pace

Credit unions are adding members and loans at an accelerated clip, though the accuracy and relevancy of those numbers are up for debate.

For credit union advocates, the increases provide evidence that people continue to lack confidence in the banking industry, boasting ongoing momentum from the Bank Transfer Day movement that coalesced in November 2011.

Those who back the banking industry, however, are quick to note that membership may be a misleading measure since people often open small accounts just to tap into low rates for certain types of loans. And they point to the credit unions' tax-exempt status as an unfair strategic advantage.

Higher loan volume, meanwhile, could partially reflect overall economic growth that should benefit all financial institutions.

"There's still a bit of an association with the dissatisfaction with the larger banks," said Keith Leggett, a consultant who runs a blog about credit unions. "But a lot of these customers are basically members in name only."

Credit union membership rose by more than 3% in June compared to a year earlier, to 103.4 million, covering nearly a third of the U.S. population, based on a report from CUNA Mutual Group, which provides financial services to credit unions. Total loans increased by roughly 11%, to $765 billion.

Some of that growth could be associated with Bank Transfer Day and the reputational damage banks sustained during the financial crisis, said Steven Rick, CUNA Mutual's chief economist. From 2012 to 2014, annual credit union membership rose by at least 2%, compared to just 0.6% in 2010.

Increased membership "started out by people understanding … that their bank is like every other business," said Chris Howard, vice president of research at Callahan & Associates, which provides software, research and other products to credit unions. "Every for-profit business needs to make money for their shareholders, but that's not a credit union's job. Their job is to serve their members."

There is room to question membership numbers, some industry experts said.

A number of new members simply open accounts to take advantage of low rates, often for auto loans. It is unclear whether credit unions can create sticky relationships with those new members that will help them bring over more accounts and sell more products.

Some bankers assert that customer migration is a result of people leaving larger banks.

Tomahawk Community Bank in Wisconsin has been adding clients since the financial crisis, said Kathy Rankin, the $87 million-asset bank's president and chief executive. Still, Rankin said she believes credit unions and community banks are aggressively competing against each other.

"Every community bank is feeling competition from credit unions," Rankin said. "Credit unions have money from their tax exemption to work with. We're basically in the 40% tax bracket, but credit unions are exempt from that expense. So they're just growing and growing."

Still, double-digit increases in credit union loan volume should be troubling for bankers.

Net loans and leases at banks rose by 5.5% in the second quarter compared to a year earlier, based on data from the Federal Deposit Insurance Corp.

Overall economic improvement, along with national job growth, could be aiding both credit unions and banks.

Credit unions "are not necessarily taking customers away from banks," said Brittany Dengler, senior research manager for economic policy and research at the American Bankers Association. "Our economy has been recovering. … Instead, it's really a reflection of an improving economy and improving consumer confidence."

Loan growth is "tied to what's happening in the economy," said Curt Long, director of research and chief economist at the National Association of Federal Credit Unions. "On that front, we're pretty optimistic that the next few years will be good for credit unions, as well as other lenders."

Not all credit unions are reporting higher numbers; membership at roughly half of all federally insured credit unions fell in the second quarter compared to a year earlier, according to the National Credit Union Administration.

Credit unions with $500 million or more in assets tend to lure more members because they can offer more sophisticated products, said Peter Duffy, a managing partner at Sandler O'Neill. "It's a tale of two cities," he said.

"From the standpoint of economies of scale, there's a uniqueness that allows [bigger] institutions to compete effectively," Duffy added.

Another metric to consider is deposits at credit unions, which increased by nearly 6% in June compared to a year earlier, according to CUNA Mutual. This could indicate that credit unions are doing an effective job adding checking and savings accounts.

"Credit unions are getting larger and a bit more sophisticated on using big data analytics," Rick said. "They're doing a better job of analyzing their needs and … cross selling."

Regardless of the underlying causes, or the stickiness of new relationships, increased activity at credit unions can erode banks' franchise values, industry observers said. Meanwhile, credit unions are continuing to push for increased lending opportunities, particularly when it comes to member business loans.

Central Savings Bank in Sault Sainte Marie, Mich., has seen credit unions in its market pursue its retail and commercial clients, said Ronald Meister, the $238 million-asset bank's president and chief executive. "We've seen credit unions continue to expand," he said.

"Not only are they offering a very inexpensive rate on consumer loans based on their tax advantage," Meister added. "They have also expanded into the commercial market more aggressively. It is cutting into our business."